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Business Officer Magazine

Rustling Up Resources

Planning ahead is imperative when it comes to paying for renewable energy projects. In NACUBO’s new book Financing Sustainability on Campus, Ben Barlow, with guidance from Andrea Putman, brings higher education leaders a virtual blueprint for analyzing energy economics. This excerpt explains the role of the business officer in shaping projects and arranging sufficient funding to support their implementation.

By Ben Barlow and Andrea Putman

Well-designed sustainability initiatives incorporate financial analysis from their inception. Business officers can make valuable contributions to sustainability initiatives at an early stage, by identifying and analyzing the economics of proposed projects. By becoming involved at the beginning, business officers can also help shape projects that attract sufficient and competitive sources of funding. ...

Sharing Sustainability Stories

To enhance the new publication Financing Sustainability on Campus and make it an even richer resource for college and university administrative and business officers, NACUBO intends to create a Web-based Financing Sustainability Resource Center. Senior staff, administrators, sustainability managers, and even student leaders will want to access initial guidance that will help them better understand a wide range of financing options for accomplishing sustainability projects on campus. Free to all NACUBO members, the Web resource will be accessible through the NACUBO Web site.

NACUBO is also collecting case studies and best practices from institutions of all sizes and types. If you are interested in sharing the financing story of any sustainability project on your campus, please contact

Pursuing Funding

Blending projects—sequencing. When designing sustainability programs, colleges and universities should determine whether they prefer to let returns on sustainability projects revert to the general fund, or to apply those returns as funding for subsequent sustainability investments. Naturally, each institution will be guided in making this decision by its own circumstances, including its sustainability goals, competing demands for capital, and other factors. Size and timing of returns vary between sustainability investments, so a given project's returns provide a “reinvestable” source of funds that are suitable for some projects but not others. Colleges and universities frequently earmark savings from energy-efficiency projects as a funding source for further efficiency or other sustainability investments. To carry this out, the administration channels savings into an account or fund dedicated to future sustainability investments instead of allowing the savings to revert to the general fund. An institution can earmark “top line” savings from projects, rather than use those savings to service the debt that funded the original project, or instead earmark net cash flows after all project costs have been covered.

When institutions use efficiency savings to pay for renewable energy, they usually channel the savings toward REC [renewable energy credits] or third-party power purchases rather than on-site development, due to the scale and timing of efficiency savings. The capital requirements of most on-site renewable projects would outstrip savings from even the largest energy-efficiency projects, and renewable projects require capital up front whereas efficiency savings accrue over a number of years. However, institutions can use energy savings to pay for a portion of development costs, such as debt service which occurs over time much like energy savings. Sometimes, an institution issues a loan from its general fund to the sponsor of a renewable project and determines that the sponsor will cover debt service entirely or in part with savings from energy-efficiency investments.

To rely on energy savings as a source of funding, an institution must estimate with confidence the dollar value of those savings. An institution can estimate this value based on pre-installation engineering estimates, actual savings measurements for projects already installed, and/or calculations using the International Performance Measurement and Verification Protocol procedures.

Aggregating projects—scaling. Colleges and universities often benefit in at least three ways by aggregating multiple sustainability projects into a single, larger project: efficiencies of approaching energy systems holistically rather than as a sum of discreet pieces of equipment; bulk pricing on goods and services; and improved financing rates. Naturally, business officers should weigh the potential for achieving these monetary savings against the cost of delay and other expenses associated with coordinating a large, sophisticated sustainability effort.

  • Aggregating for intra-system efficiencies. Rather than view and invest in a facility as the sum of discreet pieces of energy-related equipment (boilers, chillers, and lighting in a building, for instance), an institution should consider how those pieces relate to one another and invest in the facility as a unified system. By taking this approach, an institution can optimize efficiencies among facilities' many energy-related parts. ESCOs [energy services companies] and other sophisticated energy consultants bring this holistic perspective and expert understanding of systems to efficiency investments and other integrated energy projects.
  • Aggregating for bulk-purchasing discounts. ...Opportunities for bulk-purchasing discounts abound across a range of sustainability investments.

    One [such] area ... is in the purchase of green power. For example, 40 Pennsylvania colleges and universities have realized discounted pricing by purchasing wind through a consortium called the Pennsylvania Consortium for Interdisciplinary Environmental Policy (PCIEP). Similarly, six colleges and universities in New Jersey have aggregated their purchase of fuel cells to obtain better pricing, while others are purchasing discounted green power by aggregating in conjunction with state agencies. In June 2005, the University of California (UC) and California State University (CSU) combined to purchase 73,000 MWh worth of wind and landfill RECs, which at the time represented 15 percent of their combined load and the largest-ever purchase of renewable energy by a university system. Because of the size of this purchase, the universities paid only 25 cents per student, or about $42,000 a year, for the initial six-month REC contract. ...
  • Aggregating for improved financing terms. ... By bundling multiple projects into a single financing, an institution may be able to spread transaction costs across a larger total financing. An institution also might find that by aggregating enough projects (not all of which need to relate to sustainability), the institution positions itself to raise money on the capital markets and, in doing so, realizes lower interest rates. Of course, business officers should weigh the potential for realizing these benefits of combined financings with the potential downsides, such as delaying projects in anticipation of a larger financing and forgoing project-specific financing opportunities that can be lost in a combined financing (for instance, when attracting tax equity investors, funding a renewable project with a bond may make more sense).

Combining sources of financing. Colleges and universities fund all but the smallest projects from a combination of sources, as most projects require funding that exceeds amounts available from any single source.

In designing a funding strategy, a business officer should begin by determining which funding options fit the envisioned project well. One distinguishing feature of projects is the timing of their funding requirements. For instance, while on-site renewable developments require significant upfront capital outlays, energy efficiency retrofits frequently pay for themselves over time under leases. Projects also distinguish themselves by the amount of security the project offers financiers, with financiers preferring collateral such as power purchase agreement (PPA) payment commitments and easily detached assets to weaker forms of security such as assets installed in buildings that are difficult to remove and resell. Each project's requirements regarding timing and scale of funding and offerings in terms of security of lenders will guide a business officer's search for project financing.

One distinguishing feature of projects is the timing of their funding requirements.

Once informed about funding norms for the project in question, a business officer must next assess his/her institution's ability to secure the appropriate types of funding. Typically, business officers will find that their institution is well positioned to tap some sources of funding, while less able to access other sources. For instance, while public universities are eligible to issue clean renewable energy bonds, independent institutions cannot issue these bonds. Most determinants of an institution's ability to access financing are less binary than whether they are public or private, and include factors such as: size and status of operating and capital budgets; scale and covenants of existing borrowings; credit rating; alumni and student readiness to support sustainability projects; and geographic location, to the extent some utilities may offer more attractive incentives than others. These are a few of the factors that guide a business officer's ultimate determination of a project-funding strategy that is both appropriate and feasible.

Depending on the project, business officers might start their funding considerations by analyzing what resources if any the institution could allocate from its operating and capital budgets or other internal sources. Simultaneously, business officers might explore opportunities to receive subsidized funding through utility rebate programs or public and private grants. While these sources can seem particularly attractive because they appear cost free, business officers should remember that any source of capital has some cost. For internal funds, this cost equals the opportunity cost of sacrificing an alternative use of those funds—be that paying down debt or funding other priority projects with the capital in question. For internal funds, rebates, grants, and all types of funds that an institution cannot access immediately, the business officer should assess the cost of waiting for those funds defined in savings or income forgone while delaying project initiation.

Often, a business officer will seek to work with a third party in part because that third party is able to capitalize on subsidized financing that the institution cannot receive. This is particularly common with renewable power projects, which often qualify for tax-related incentives that colleges and universities cannot use due to their tax-exempt status.

For example, business officers often fund wind development from numerous sources, even when they are able to reduce upfront costs through operating leases or performance contracts. Institutions manage to fund only very small development projects (e.g., a few kilowatts of installed capacity) or research projects entirely through rebates and grants and often arrange multiple funding sources even for these small-scale projects. For larger wind development projects, a business officer might cover one third of capital costs with state and federal grants. The institution might fund another 50 percent of development costs with debt structured to allow the institution to service the debt with revenue from the wind project's electricity sales. With nearly 90 percent of the costs covered by rebates, grants, and debt, the institution might cover the remaining costs with allocations from its capital or operating budgets, alumni gifts, or, in the case of wind projects large enough to attract private equity, equity from investors who invest in return for the project's production tax credits and other tax-related subsidies. This scenario is just one of many financing combinations a business officer might arrange to fully fund a renewable development project.

Read Make Sustainability a Marketing Centerpiece or return to the introduction.